Please note you are leaving Candid Money, a financial guidance site not regulated by the Financial Conduct Authority, to go to Candid Financial Advice, a financial adviser that is authorised and
regulated by the Financial Conduct Authority.

Fund platform changes could help customers

The Financial Services Authority (FSA) has published more details regarding its plans for fund platforms/supermarkets as part of its overall Retail Distribution Review (RDR). Good news for customers?

For the uninitiated, RDR is the FSA's attempt at cleaning up financial services and reduce the likelihood that customers get taken for a ride by financial advisers and the industry in general. The main proposal is that commission payments to financial advisers will be banned and the rules are due to affect from 31 December 2012. You can read more details in my previous article.

The recent announcement concerns fund platforms (also referred to as fund 'supermarkets'), such as Cofunds, FundsNetwork, Skandia and Hargreaves Lansdown. On the whole platforms are a good thing, they provide plenty of investment choice (especially useful for ISAs and SIPPs) and simplify paperwork and administration.

However, there are a few potential issues the FSA is keen to address. They've been highlighted before, but the latest FSA update puts more flesh on the bones.

Payments by fund providers to fund platforms

Fund providers pay platforms to include their funds. The charge, thought to be around 0.25% or more a year, is normally paid out a fund's annual management charge, so customers indirectly pay the platform fees.

The problem with this is that it's not transparent, customers don't know how much a platform is getting paid so there's little incentive for platforms to complete on price. Plus those platforms who promote funds via 'best buy' type lists might be biased towards the funds that pay them the most money - customers have no way of knowing as things currently stand.

The FSA has said it wants to ban these payments, which I hope means funds will be priced at institutional rates for all investors then we'll be free to shop around for the best platform deal that suits our needs. However, the wheels of our financial regulator turn slowly and we're told any changes won't be implemented by the time RDR is initially introduced. Meanwhile it seems platforms will have to disclose how much they receive from fund pro0viders from 31 December 2012 - a positive start.

This won't please many fund platforms - Hargreaves Lansdown's share price fell over 12% today in response. But it should be a result for customers. (incidentally, Citigroup reckons Hargreaves Lansdown's average margin for Vantage clients is currently 0.68%).

Payments by fund platforms to customers

Fund platforms can pay cash rebates to customers, potentially helping to offset charges for financial advice (i.e. the customer might pay for some/all of the advice via product charges even after commissions are banned). The FSA doesn't like this as it muddies the waters on how much a customer is actually paying for advice and smells too much like commission in disguise. It plans to ban them, but again a final decision has been deferred until after 31 December 2012 - not very helpful...

Re-registering investments between platforms

As previously announced, fund platforms will have to allow customers to re-register their investments (i.e. transfer 'as is') between all platforms and nominee accounts by 31 December 2012. Good news, but why some platforms still refuse to offer this already is beyond me (must be protectionism...).

Advice and independence

Advisers will not be able to use one platform exclusively and call themselves independent. In practice they might have a preferred platform for the majority of the customers, but they'll need to consider and use other options when it's in their customer's best interests. Sound's sensible to me.

Conclusion

The FSA seems to be inching towards introducing some long overdue rule changes. I hate to think how much time and money they've taken to conclude something that would take the rest of us 10 minutes, but at least they're getting there...

And if all this sounds a bit boring and tedious, I sympathise , it's not a riveting read. But take it from me, this is important stuff that could potentially make a big difference over years to come.

If you found this article helpful, please add your vote by clicking here.

Can only be good news for investors. We do at last seem to be going in the right direction.

While I'd agree that it's taken far too long I tend to have more sympathy than most for the FSA. It's hardly been a one-sided battle when they've been up against the huge resources and political lobbying power of the the investment industry, the banks, and IFAs - all determined to keep the gravy train rolling in their direction.

Consultation has been dragged out for five years and some tame MPs more interested in looking after the industry than their voters had asked the FSA to delay implementation for yet another year. The FSA would have had a much quieter life if they'd let them get away with it.

Investment trusts in the main don't pay backhanders to financial advisers or fund platforms and the FSA announcment has been welcomed by their Association of Investment Companies asking for a ban on rebates and bundled charges 'as soon as possible'. They say: “Delaying the decision to ban such payments… risks inappropriate practices becoming embedded which will be harder to unwind at a later stage”.

Comment by EdSwippet at 11:21pm on 03 Aug 2011:

Could the end of payments by funds to platforms perhaps mean the end of the golden age of no-annual-charge ISAs -- and perhaps also no-annual-charge SIPPs and trading accounts -- from fund supermarkets?

A cost-conscious investor (hello!) can currently hold cheap trackers in an ISA without an annual ISA fee. Cheap trackers pay either nothing or nearly nothing to the platform. Presumably this is subsidized by other platform users who hold the more expensive funds that do currently pay the platform. And without this subsidy a platform could choose to levy its own separate fee. One unfortunate effect of the RDR then might actually be to raise the costs for what are currently the lowest cost offerings.

The RDR may also erode the competitive advantage carved out by Alliance Trust, Cavendish Online, and other brokers who already currently refund all their commissions to customers. That would be a pity -- these brokers are the "good guys".

Comment by justin at 9:01am on 04 Aug 2011:

EdSwippet - difficult to tell at this stage.

The likes of Cavendish should be unaffected if the following example holds true.

Current - you buy a fund with 1.5% AMC, which includes 0.5% trail commision and 0.25% platform fee. Cavendish Online charges a one-off £25 fee and rebates the 0.5% trail commission, so your net cost is 1% a year annual fund charge and the £25 fee.

Your point re: the potential cross subsidisation of trackers is interesting. You can buy ETFs within a SIPP for dealing fees only (e.g. with Sippdeal) so this should be viable, if low margin business. But you're right, some platforms might end up being more expensive for trackers, although Hargreaves Lansdown already charges 0.5% a year where no trail commission is paid.

Perhaps those with the biggest challenge will be discount brokers who don't currently rebate any trail commission and provide little value (e.g. research/guidance/advice) in return - there are quite a few and I suspect they'll struggle to justify why they're worth 0.5% a year once RDR (hopefully) makes customers more aware of such issues.

Comment by BernieB at 10:38am on 04 Aug 2011:

In "allowing customers to re-register ... between all platforms," will platforms be able to make charges for this service, that might make re-registration more difficult than it should be?

Comment by justin at 8:29am on 05 Aug 2011:

BernieB, looks a bit vague at the moment. The FSA has said in the past that platforms can charge for 'manual' re-registration of assets. No mention (that I can see) for re-registering via an automatic system - something that is currently being worked on by the Tax Incentised Savings Association.

Most platforms don't seem to currently charge for re-registration out (assuming they allow it!), but there are notable exceptions - e.g. Hargreaves Lansdown charges £20 per stock for an in specie transfer out.

I suspect we'll get to the point where the process will be automated and the FSA will then prohibit any charges for re-registering, but whether this will be in place by 31 December 2012 is anyone's guess...